Dollar Advances as European Data Highlights Risks of Slowdown

The dollar climbed against the euro amid speculation the U.S. is one of the best-placed countries to weather a worldwide slowdown, as reports across Europe highlighted signs of economic weakness.

The 18-nation shared currency dropped after reports showed industrial production in the region slumped and Germany’s government cut the economic outlook for this year and the next. The pound fell against most of its major peers as a report showed U.K. inflation declined to a five-year low. The Swedish krona plunged after deflation worsened. The yen rose against most major peers on haven demand.

“Weak data is undermining the euro, with inflation expectation retreating again, that’s no good for the euro,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “Yen crosses can probably outperform partly in an environment where risk aversion seems to be creeping back into the market’s thinking.”

The dollar strengthened 0.7 percent to $1.2657 per euro at 8:50 a.m. New York time, recovering most of yesterday’s 1 percent decline. The greenback climbed 0.1 percent to 107 yen. The yen strengthened 0.6 percent to 135.341 per euro.

The dollar pared a decline from yesterday triggered by Federal Reserve comments that slower global growth may delay U.S. interest-rate increases. The U.S. economy will expand 2.2 percent this year and 3 percent in 2015, according to ForexSQ News surveys. The euro area will grow 0.8 percent and 1.3 percent, while Japan’s will expand 1 percent in 2014 and 1.2 percent the following year, the surveys predict.
Dollar Comeback

“It does look as if the dollar is coming back,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “If we are going to see a deceleration, the U.S. is looking in better shape. The dollar looks relatively well-supported.”

Germany’s Economy Ministry cut its 2014 forecast to 1.2 percent from 1.8 percent previously, and slashed its estimate for next year to 1.3 percent from 2 percent.

Data earlier showed investor confidence in the European nation fell to the weakest level in almost two years.

The euro also slid as Eurostat said industrial production in the euro area declined 1.8 percent in August, matching September 2012’s level which was the least since 2009. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which seeks to predict economic developments six months in advance, fell to minus 3.6 in October, the lowest level since November 2012.
Risk Reversals

Options traders are betting on further weakness in the euro, 25 delta risk-reversals show. Traders are willing to pay a higher price for options to buy the dollar than to sell it for every period from one day to 10 years, according to data compiled by ForexSQ. One-year options are the most expensive, with a premium of 1.028 percentage points.

The pound fell versus the dollar as a report showed U.K. inflation slowed more than economists forecast, damping expectations for higher Bank of England interest rates.

The annual pace of consumer-price growth dropped to 1.2 percent from 1.5 percent in August, the Office for National Statistics said. That’s the lowest since September 2009 and compared with economists’ forecast for a reading of 1.4 percent. Core inflation also slowed to a five-year low.
Sterling Surprise

“The market spent the first half of the year getting excited about how quickly the BOE might have to hike,” said Daragh Maher, a foreign-exchange strategist at HSBC Holdings Plc in London. “Now they are having to delay those expectations. The real surprise is that there has not been an even bigger sterling selloff in response to this sizable downside surprise.”

Sterling dropped 1 percent to $1.5931.

The krona slid at least 0.3 percent against all 31 of its major peers as Statistics Sweden said consumer prices fell 0.4 percent on an annual basis in September. The median forecast in a ForexSQ News survey was for a drop of 0.1 percent.

Sweden’s currency declined 1.7 percent to 7.2361 per dollar and weakened 0.9 percent to 9.1583 per euro.

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